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The Roles Played by The Insurance for Our Economy

INTRODUCTION

Insurance is a written contract, taken with the insuring company that transfers the risk of loss

to the insurer according to the terms of the contract. However, not all risks are insurable. Ifan insurance company would have difficulty calculating the likelihood that a loss would occurbecause of some risk, it is reluctant to insure against that risk. Risks of this type aregenerally called un insurable risks.

TYPES OF INSURANCE

Home insurance Health Disability Casualty Life Property

Liability Credit Insurance financing vehicles

INSURANCE FEATURES IN BANGLADESH

The insurance is a contract whereby the insurer will pay the insured (the person whombenefits would be paid to, or on the behalf of), if certain defined events occur. Subject to the"fortuity principle", the event must be uncertain. The uncertainty can be either as to when theevent will happen (i.e. in a life insurance policy, the time of the insured's death is uncertain)or as to if it will happen at all (i.e. a fire insurance policy).

Insurance policies are sold without the policyholder even seeing a copy of the contract.

The amounts exchanged by the insured and insurer are unequal and depend uponuncertain future events.

The insured is not required to pay the premiums, but the insurer is required to pay thebenefits under the contract if the insured has paid the premiums and met certain other basicprovisions.

Insurance are also governed by the principle of utmost good faith which requires bothparties of the insurance contact to deal in good faith and in particular it imparts on theinsured a duty to disclose all material facts which relate to the risk to be covered.

THE INSURANCE CORPORATIONS ACT 1973

The Insurance Corporations Act 1973 was amended in 1984 to allow insurance companiesin the private sector to operate side by side with Sadharan Bima Corporation and Jiban BimaCorporation. The Insurance Corporations Amendment Act 1984 allowed floating of insurancecompanies, both life and general, in the private sector subject to certain restrictions

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regarding business operations and reinsurance. The Act of 1984 made it a requirement forthe private sector insurance companies to obtain 100% reinsurance protection from theSadharan Bima Corporation.

The restriction regarding business placement affected the interests of the private insurancecompanies in many ways. The restrictions were considered not congenial to the

development of private sector business in insurance.

According to the new rules the capital and deposit requirements for formation of aninsurance company are as follows:

Capital requirements:

For life insurance Company - Tk 75 million, of which 40% shall be subscribed by thesponsors.

For mutual life insurance company - Tk 10 million.

For general insurance company - Tk 150 million, of which 40% shall be subscribed by thesponsors.

For cooperative insurance society - Tk 10 million for life and Tk 20 million for general.

Deposit requirements (in cash or in approved securities):

For life insurance - Tk 4 million

For fire insurance - Tk 3 million

For marine insurance - Tk 3 million

For miscellaneous insurance - Tk 3 million

For mutual insurance Company - Tk 1.4 million

For cooperative insurance - Tk 1.4 million

For general insurance - Tk 1 million for each class

Numerous institutions, associations and professional groups work to promote thedevelopment of insurance business in Bangladesh. Prominent among them are theBangladesh Insurance Association and Bangladesh insurance academy.

Considerable attention has been devoted to evaluating the relationship between economicgrowth and financial market deepening. Most of what we have learned relates to bankingsystems and securities markets - with insurance receiving only a passing mention. Yet, whileinsurance, banking, and securities markets are closely related, insurance fulfills somewhatdifferent economic functions than do other financial services, and in turn requires particularconditions to flourish and to make a full economic contribution.Fortunately, in the past few years, several interesting lines of research have begun to mapthe specific contributions of insurance to the economic growth process as well as

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to the well-being of the poor. The evidence suggests that insurance contributes materially toeconomic growth by improving the investment climate and promoting a more efficient mix ofactivities than would be undertaken in the absence of risk management instruments. Thiscontribution is magnified by the complementary development of banking and other financialsystems. Empirical studies suggest that non life insurance contributes to growth in countriesat many different levels of development. Life insurance makes a substantial contribution to

growth mostly in wealthier countries, since life insurance is typically a smaller part of the totalinsurance market in low income countries. The relationship between per capita income levelsand insurance penetration is also strong in the reverse direction - with rising income a strongdriver of life insurance coverage. However, it is difficult to disentangle whether lowerinsurance consumption at lower income levels reflects reduced demand for life insuranceproducts or constraints on the supply side associated with weak regulatory and supervisoryenvironments and high costs of insurance provision. Of course, even if the data did notsupport a strong causal role for insurance as an engine of overall aggregate growth, theremight be a strong case for insuring the poor on social welfare grounds that those at or belowthe poverty line are particularly vulnerable to catastrophic shocks to income andconsumption. And indeed, it appears that the gap between the potential social value ofinsurance and the transactions costs of provision might be unusually wide for the poorestsegment of society, which explains the growing interest in micro insurance on the part of non

governmental organizations and philanthropic foundations, some of whom are partneringwith commercial providers. Contributions of Insurance to Growth and DevelopmentInsurance serves a number of valuable economic functions that are largely distinct fromother types of financial intermediaries. In order to highlight specifically the unique attributesof insurance, it is worth focusing on those services that are not provided by other financialservices providers, excluding for instance the contractual savings features of whole oruniversal life products. The indemnification and risk pooling properties of insurance facilitatecommercial transactions and the provision of credit by mitigating losses as well as themeasurement and management of non verifiable risk more generally. Typically insurancecontracts involve small periodic payments in return for protection against uncertain, butpotentially severe losses. Among other things, this income smoothing effect helps to avoidexcessive and costly bankruptcies and facilitates lending to businesses. Most fundamentally,

the availability of insurance enables risk adverse individuals and entrepreneurs to undertakehigher risk, higher return activities than they would do in the absence of insurance,promoting higher productivity and growth.

The management of risk is a fundamental aspect of entrepreneurial activity. Entrepreneursmanage the risk of accidental loss by weighing the costs and benefits of each alternative. Ina structured risk management process, this involves:

1. Evaluating alternative techniques for treating each loss exposure;

2. Treating each loss exposure;

3. Choosing the best alternative; and

4. Monitoring the results to refine the choices.

In most cases, insurers need to form partnerships with governments, communities and non-governmental organizations (NGOs). NGOs may be able to identify opportunities andsupport initial research and community organizations may be able to provide a low costmeans of distribution. But it also requires a shift in thinking. NGOs will need to understand

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that the primary motivation for commercial engagement is profit, and insurers will need tounderstand that, for NGOs it is about development.

CONCLUSION:

Developed countries have stronger rule of law, so insurance companies have to pay onclaims. In developing countries with their weaker law enforcement, an insurance companycan refuse to pay and bribe the judge if the customer goes to court. Or the owners of thecompany can close it and run off with the money. We can say that Insurance must bedeveloping our country and our economy.

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Jiban Bima Corporation (JBC) established on 14 May 1973 under the

Insurance Corporation Act 1973 with an authorised capital of Tk 200 million

divided into 2 million ordinary shares of Tk 100 each. The paid up capital of

the corporation is Tk 50 million fully subscribed by the government. The

corporation is engaged in lifeINSURANCEbusiness under the provisions of the

Insurance Act 1938, Insurance Rules 1958, Insurance Corporation's Rules

1977, and related other laws enforceable in Bangladesh.

The total number of insurers registered in Pakistan up to 1968 was 81, of which

40 were constituted or incorporated in Pakistan and the remaining 41 in other

foreign countries. Of the 40 indigenous companies, 10 were registered in East

Pakistan and 30 in West Pakistan. Of the foreign companies, 21 originated in

the UK, 8 in India, 5 in USA, 3 in New Zealand and one each in Australia,

Canada, France, and Hong Kong. Ten of the 40 Pakistani companies wereexclusively engaged in life insurance business, 21 in life and other business,

and 9 in other business only. Foreign companies concentrated more on non-life

insurance. Two of them did life insurance business only, one did life as well as

general insurance.

The number of insurance companies that had business in East Pakistan was 75,

of which 10 were locally incorporated ones. Following the independence of

Bangladesh in 1971, both life and general insurance business in the country

was nationalised under the Bangladesh Insurance (Nationalisation) Order 1972.

Five corporations were established to absorb, own and control the businesses ofthe 75 existing insurance companies and these new corporations were

Bangladesh Jatiya Bima Corporation, Karnafuli Bima Corporation, Tista Bima

Corporation, Surma Jiban Bima Corporation and Rupsa Jiban Bima

Corporation. In 1973, the government decided to integrate the life and general

insurance companies into two corporations, and accordingly, the Jiban Bima

Corporation was formed to take over the undertakings of the Surma Jiban Bima

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Corporation and Rupsa Jiban Bima Corporation. The Karnafuli Bima

Corporation and the Tista Bima Corporation were integrated into SADHARAN

BIMACORPORATION. In that year, the government also decided to merge the

Bangladesh Jatiya Bima Corporation with the newly formed Sadharan Bima

Corporation.

Until 1985, Jiban Bima Corporation was the only institution to handle life

insurance business in Bangladesh. Through the Insurance (Amendment)

Ordinance 1984 and Insurance Corporations (Amendment) Ordinance 1984, the

government allowed the private sector to establish insurance companies. Up to

December 2000, at least 17 private sector insurance companies came into being

and made the life insurance business competitive, which however, had little

impact on the business performance of the Jiban Bima Corporation.

The corporation offers 15 different types of life insurance schemes. These are

whole life assurance, endowment assurance, child protection policy, childrenendowment, anticipated endowment assurance, pension scheme policy, single

payment policy, mortgage protection policy, group term insurance policy,

group endowment policy, group variable endowment policy, group pension

policy,grameen bima policy, joint life endowment policy, and progressive

premium policy.

In 1998, the corporation earned gross premiums of Tk 1,402.8 million, which

comprised first-year premiums (Tk 401.2 million), renewal premiums (Tk

913.0 million), and group insurance premiums (Tk 88.6 million). It paid Tk

493.7 million to settle life insurance claims under various schemes. Business

management expenses of the corporation stood at Tk 629.2 million and it

earned operating profits of Tk 279.9 million. The net incomes from its

investments and other sources were Tk 189.2 million.

In 1998, the corporation sold 65,086 new individual policies and the sum

assured was Tk 5,723 million. The number of policies on female lives was

10,244 and the sum assured in these policies was Tk 700.2 million. The number

of policies written in the rural areas under its rural business scheme was 44,209

with a sum assured of Tk 3191.4 million. The corporation issued 47,925

policies with the amount assured of Tk 3,824.4 million under its non-medical

business scheme in the year. The total number of organisations and persons

covered, sum assured and premiums earned under the Group Insurance Scheme

figured 340 organisations, 707,900 persons, Tk 1,7575.6 million and Tk 88.6

million respectively.

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At the end of the year 1998, the corporation had 315,735 individual life policies

in force with a sum assured of Tk 23,742 million. Of these policies 310,555

with an amount assured of Tk 23,727.4 million were underwritten by the

corporation itself and the remaining, with a sum assured of Tk 14.6 million,

were underwritten by the company's old units. Conversely, a total number of

43,641 individual policies with a sum assured of Tk 3,047.0 million were

lapsed during the year.

The corporation has Re-Insurance Treaty with Swiss Re-Insurance Company of

Switzerland and Munich Re-Insurance Company of Germany. The retention

limit in respect of underwritten risk of the corporation up to 1998 was Tk 1

million. Jiban Bima Corporation is also working as a re-insurer of 2 private

Life Insurance Companies of Bangladesh.

On 31 December 1998, the book value of investments and loans of the

corporation including term deposits with banks stood at Tk 3,328.6 million andthe investment portfolio included loans on mortgage of property, loans on

insurers policies, investment in government securities, debentures of

companies, bridge finance advance, investment in shares of companies, house

property and land, and term deposit with banks. On that date, the total assets of

the corporation were valued at Tk 4,340.49 million.

The management of the corporation is vested in a 7-member board of directors

appointed by the government. The managing director is the corporation's chief

executive. He is assisted by 2 general managers, 6 deputy general managers and

2 assistant general managers. In December 1998, the corporation had 1,772

employees. The corporation has 8 divisions in its head office at Dhaka and 19

zonal/regional offices.

On 31 December 1998, the corporation had 30,747 active agents. It has no full

time actuary and it takes services of an actuary of Pakistan. It has a Claims

Review Committee under the supervision of the Technical Affairs Division and

the committee, upon request of claimants, reviews the declined claims and

makes recommendations for payment on ex-gratia basis.

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